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Those pesky “trust funds”

In this article, an oldie but a goodie, the author explains why there is no such thing as a Social Security “trust fund.” Instead there are only accounts that the U.S. government can debit or credit at will. The author explains that the myth about the “trust fund” has been around since Social Security began eighty years ago.

I would like to quote sections and comment on them. (There is no such thing as a “highway trust fund” either.)

Much of the public is convinced that Congress is stealing from a “trust fund” where our Social Security taxes are supposedly “held in trust” to pay future benefits. People think this is why Social Security is supposedly headed for trouble, and that all Congress has to do to fix Social Security is put the stolen money back.

This belief is mistaken. There is no trust fund, and Congress is doing nothing wrong. What’s more, the source of this misunderstanding is the government’s own public-relations efforts to create support for Social Security.

The U.S. government itself created the “trust fund” myth as a public relations move.

The Social Security Act of 1935 created an “Old-Aged Reserve Account” in the Treasury, and required that every year an amount determined sufficient to pay that year’s benefits was to be appropriated to it.

Note the word “account,” which can be debited or credited at will, simply by changing the numbers in the account.

Any of this money not needed for benefits was to be invested in federal debt (including unmarketable debt issued for this purpose) earning 3 percent interest, or other government-guaranteed debt.

Translation: The U.S. government created money out of thin air for this “Old-Aged Reserve Account.” If any excess money was created, it was to be deposited at the Fed. Even today, much of the “national debt” consists of money that the Social Security Administration has deposited at the Fed.

Presently, criticism arose. Winthrop Aldrich of Chase National Bank argued that the reserve would be fictitious. He said the government would just be issuing promissory notes to itself. As for interest on the bonds, which would supposedly help pay future benefits, he said the government would get the interest money from “the only source it could obtain it—the general taxpayer.

That was eighty years ago. Republicans and the money masters started circulating the lie that taxes pay for Social Security. They falsely claimed that the government would tax you for Social Security, and then spend that tax money on whatever, and then have to tax you again to give you any benefits.

In his Milwaukee speech on Social Security during the 1936 presidential campaign, Republican candidate Alfred Landon said it was as if a father took deductions from his children’s wages to invest for their old age, “invested” them in “his own IOU,” and spent the money, leaving his kids nothing but those IOUs. Landon called Social Security “a cruel hoax.” President Franklin Roosevelt countered that Social Security tax dollars “are held in a Government trust fund solely for the social security of the workers.”

Roosevelt was lying in order to offset the lies of Landon and other Republicans. There was (and is) no “trust fund.”

Yet attacks kept coming. Critics such as General Hugh S. Johnson, former head of the National Recovery Administration, and journalist John T. Flynn said that unlike insurance companies, which invest their premiums to build a reserve to pay on their policies, the U.S. government was only issuing claims on itself. Hence the Social Security reserve was merely worthless IOUs. To pay future benefits, Americans would have to be taxed all over again.

Even today we continue to hear this nonsense about “worthless IOUs.” As with all lies about money, it is based on the fundamental lie that money is physical and limited, and that the U.S. government must therefore run on loans and tax revenue.

In 1939 the Roosevelt administration proposed various amendments to Social Security. There were congressional hearings about the reserve fund controversy. Critics accused the administration of “embezzlement.” They said the reserve was merely IOUs. They said Americans would be taxed twice.

In response, defenders of Social Security countered that there was no embezzlement, there would be no double taxation, and the much-maligned IOUs were the safest investment around—U.S. government bonds. By now three years old, the reserve-fund controversy had become a serious blow to Social Security’s prestige.

At that point the Roosevelt Administration renamed the “Old-Aged Reserve Account” the “Old Age and Survivors’ Insurance Trust Fund.” Nothing changed but the name.

On the recommendation of Treasury Secretary Henry Morgenthau, the Social Security Amendments of 1939 created an Old Age and Survivors’ Insurance TrustFund at the Treasury. This renaming was done to end the controversy. Arthur Altmeyer (Chairman of the Social Security Board) testified before the Senate Finance Committee that the purpose of the “trust fund” was “to allay the unwarranted fears of some people who thought Uncle Sam was stealing the money.”It was a public relations ploy.

The Trust Fund operated just like the old Reserve Account. Indeed, it was the Reserve Account. It was as if a shoebox full of bonds labeled “Reserve Account” was relabeled “Trust Fund.” Social Security’s Trust Fund is really a Treasury account, nothing more.

Just as we have been saying all along. By the way, what is a “trust fund”? In explaining the answer, the author gets technical, and he uses many legal terms. Essentially he says that Social Security meets none of the legal or financial criteria or definitions to be an actual “trust fund.” Social Security is an account, not a trust fund.

Despite the term “trust,” the Social Security system contains nothing that remotely resembles the common law trust. There is no segregation of assets, no equitable property rights, and no private right of enforcement (which are all characteristics of the common law trust). It is merely a system of taxation and appropriation sprinkled with “trust” terms to hide its true nature.

And now things get a bit tricky…

Social Security’s so-called Trust Fund does not operate as a trust fund does. Social Security revenues go into the Treasury’s general fund and are automatically credited to the Trust Fund in the form of Treasury bonds. The Treasury pays Social Security benefits and administrative outlays out of general revenue and debits the Trust Fund an equivalent value of bonds. Any leftover Social Security revenue finances general government operations, with an equivalent value of bonds remaining in the Trust Fund as Social Security’s “surplus;” to cover any revenue shortfalls. This is how a Treasury account, not a trust fund, works. And calling a Treasury account a “trust fund” to influence public opinion does not make it a “trust fund.”

This needs explanation. I say that the U.S. government has no need or use for tax revenues, and effectively destroys revenues on receipt. This author says no, FICA tax revenues, for example, go to the Treasury’s general account at the Fed, and are used to buy Treasury securities. Who is correct? Technically he is, but I say it’s just a numbers game, so what’s the difference? Money is not physical. Money is created and destroyed by changing the numbers in accounts. FICA tax revenues are not physical. They are merely numbers. If they are credited to a Treasury account at the Fed, that’s just a formality. It’s a bunch of accounting tricks to keep the numbers game balanced, in order to avoid inflation and disruption.

The U.S. government creates money out of thin air by crediting accounts. In order to avoid inflation, when the U.S. government credits one account, it generally tries, whenever possible, to debit some other account. (Federal taxes debit the entire economy.) Therefore, when the Treasury pays out Social Security benefits, the Treasury tries to debit its own account at the Fed. If the numbers don’t match up, the Treasury fudges them. No big deal.

Despite all this, it remains true that money is infinite, the U.S. government is not “bankrupt,” and Social Security is not “unsustainable.”

In all respects, then, Social Security’s Trust Fund is bogus. The adoption of the label “trust fund” for what was in fact a Treasury account was intended to cash in on the public’s understanding of this term—that assets are absolutely safe, invested on one’s behalf, and are held for one’s future use—and to reassure the public that Social Security was sound and trustworthy.

The semantic trick worked. The reserve controversy disappeared. Over the following decades, Social Security continued to make public-relations capital out of the “trust fund” myth by repeatedly telling the public that benefits are paid out of a trust fund built up from their tax payments.

The author then explains that the “trust fund” myth is useful, but unfortunately people can still claim (falsely) that the U.S. government is “robbing it.”

Talk of Congress’s “raiding” or “dipping into” the Trust Fund to cover federal budget deficits continues to this day. People say the government is spending the Social Security surplus. They say there is no real reserve, nothing but worthless IOUs. It’s the old reserve-fund controversy all over again, but now with the added anger that the “trust fund” is being “robbed.”

The New Dealers of the 1930s did not foresee that this “trust fund” phrase might someday work to weaken rather than strengthen faith in the government and in Social Security. Lifting assets from a trust fund is a serious crime and a breach of faith and trust. The more firmly people believe that the Social Security “Trust Fund” really is a trust fund, the angrier they will be at stories of Congress’s looting it.

And the more they will be inclined to believe the lie that Social Security is “unsustainable.”

But as we have seen, there is no trust fund to be looted, only a Treasury account. And Congress is only doing what the Social Security law requires.

I thought the image below was cute. At a drive-in movie, three young boys don’t care about the film. They’re excitedly watching the realshow, which is the boy and girl necking in the car behind them.

The drive-in theater was created in 1933 by chemical company magnate Richard M. Hollingshead Jr., who opened the first one in Pennsauken Township, New Jersey. Drive-ins took off after World War II. By their peak in the late 1950s and early 1960s, there were more than 4,000 drive-ins across America. They continued to show mainstream Hollywood fare for families, but they also became popular with teenagers, who would see the latest B-Movies with science fiction monsters, juvenile delinquents, and early rock & roll. For teens, the privacy factor made drive-ins notorious as “passion pits.” Drive-ins gradually declined because real estate became too valuable to “waste” on a business that could operate for only a few hours a day, a few months a year, and which was subject to bad weather. Meanwhile, audiences began turning to cable TV and home video for their movie fix, plus multiplex theaters. Some drive-ins responded by changing their emphasis from family fare to increasingly violent and sexually explicit exploitation and horror films. Some even showed porn. Many added multiple screens. Some rented their land during the day to other businesses such as flea markets—or they managed such businesses themselves. Especially in urban areas, the vast expanses of land necessary for a drive-in became too expensive to maintain, and the land was sold for redevelopment. Most drive-ins were forced to close between 1970 and 2000. In many cases, the land was even turned over to build multiplex theaters.